Mining: Year In Review 1994

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Mining companies face challenges peculiar to their industry. Proximity to markets, infrastructure, and political risk all figure in investment decisions but, first and foremost, geology dictates the geographic location of mines. The resource begins to deplete as soon as mining commences. Because they are exploiting a depleting asset, mining companies cannot survive without committing investment in new projects. Judging the best time to invest in order to achieve the best rate of return is notoriously difficult. The more successful companies are those with the best timing--whether deliberate or fortuitous.

Few succeed completely. The mining industry has always been characterized by "feast or famine"--overproduction when demand is weak and underproduction when demand is strong. The former situation had prevailed for a few years, as witnessed by recent record stock for a number of metals and minerals. Now that demand was strengthening and prices for many raw materials had moved sharply higher, the temptation for many would be to restart idled capacity or invest in new capacity too quickly, thereby ensuring that the cycle continued.(For Indexes of Production, see Table.)

As is usually the case, the health of the mining industry in 1994 was tied closely to overall economic activity. Although there were signs of economic improvement in the mature industrialized countries, the recovery was not synchronized; the U.S. was a strong performer, but the U.K. led only a fairly diffident recovery in Europe, while Japan remained in recession. Demand for metals and minerals in the industrialized economies continued to grow but at a far slower rate than incomes and output, and the world appeared to be witnessing a major geographic shift in terms of demand toward Asia.

As the principal source of foreign earnings, minerals were given priority by the new government of South Africa. Issues being debated included mineral rights and private versus state ownership, health and safety standards, small-scale mining, and the role of the industry in the government’s development program. In the countries of the former Soviet Union, the slump in domestic consumption of metals and minerals continued, which ensured that exports of raw materials were maintained at a high level. The beginnings of economic recovery in the mature Western economies, however, meant that Russian exports did not weigh as heavily on the markets in 1994 as had been the case in 1993.

In an analysis of exploration strategies by 151 companies accounting for some $2.1 billion of spending, approximately 80% of the world total, Metals Economics Group found that for the first time the largest share of funding was directed to South America (26%), followed by Australia (21%), the U.S. (16%), Canada (14%), and the Pacific region (8%).

For a number of reasons, gold in 1994 again proved to be the major attraction. The technology was at hand to exploit very low-grade deposits (as little as one gram per metric ton could be mined profitably), and the process to treat the ore and recover the gold was relatively simple. Most important of all, production costs could be very low, often less than half the price received for the gold. A successful gold project could therefore present a rapid and handsome return on the capital invested, and for a number of mining companies, it was profits from gold operations that helped them survive a prolonged period of low prices for their other products. The well-explored areas of North America continued to reveal new gold deposits, and the success of modern exploration techniques in Australia generated another exploration boom there. In South America the main focus was on Chile and Venezuela and, increasingly, on Peru, Argentina, and Bolivia. In the southwestern Pacific region, Papua New Guinea and Indonesia were front-runners. Elsewhere, West Africa was rapidly emerging as a major new area for gold exploration. Australian companies were already firmly established there, but the large South African mining houses, no longer restricted in their overseas activities, were quick to secure a presence, notably in Ghana. Promising new discoveries were also being made in Mali, Côte d’Ivoire, Burkina Faso, and Guinea.

In September, Ashton Mining, which operated the world’s largest diamond mine, at Argyle in Western Australia, disclosed that it had discovered a diamond province in Finland. The worldwide search for diamonds over the past three years received much publicity as a result of a major discovery in Canada’s Northwest Territories. The initial claim staking there rivaled the days of the Yukon gold rush, but excitement then moderated, and to date only one deposit seemed certain to develop into a major commercial mine. The project, a joint venture between Dia Met Minerals and Australia’s Broken Hill Proprietary, could begin production in 1998. (See alsoWORLD AFFAIRS: Arctic Regions.) Improved technology and recovery techniques continued to make seabed diamond mining attractive, and several projects were launched, mainly off the coast of Namibia. Meanwhile, in November, De Beers Consolidated Mines, the South African diamond-mining giant, gave up its monopoly in Namibia in exchange for a guaranteed 25-year 50-50 stake with the Namibian government in a new firm, Namdeb Diamond Corp.

An estimated 80% of the world supply of rough (uncut) diamonds was controlled by De Beers through its Central Selling Organisation. The size of its stockpile was never disclosed, but over the past two years the CSO had been under pressure because of only moderate demand and because of a large increase in the supply of diamonds reaching the market independently. Relationships with Russia, a major producer, were also strained, with the diamond industry there calling for a major overhaul of the current sales agreement when it expired at the end of 1995.

Canada recorded some of the more significant base metals discoveries. Two of the biggest nickel producers, Falconbridge and Inco, delineated large, high-grade nickel/copper deposits at depths in excess of 2,000 m (6,560 ft) on the rim of the nickel-rich Sudbury basin in Ontario. Nickel discoveries were also made in Western Australia, but the deposits there were of a different type and the processing more energy-intensive; their development could begin once the construction of a gas pipeline, being laid primarily to provide the goldfields with cheaper fuel, had been completed.

Platinova, a junior explorer, ventured into uncharted territory for zinc and announced the discovery of a large near-surface deposit in Peary Land in northern Greenland. Mining in Arctic conditions was believed to be feasible, but concentrates would have to be shipped to Europe for smelting. Elsewhere, Peru was attracting considerable exploration for lead and zinc, and major successes were expected. Moves to privatize the state mining sector were going ahead, and in October Peru’s second largest copper mine was sold to Magma Copper of the U.S. for $218 million.

The Andes Mountains were providing the world with an enormous copper "larder," and new discoveries were announced with almost monotonous regularity, mainly in Chile but also in Peru and Argentina. The technology was at hand for many deposits to be exploited by in situ leaching, in which the copper was extracted in solution and converted directly to copper cathode by electrolysis. The method was proving much cheaper than conventional processing and had significant environmental advantages--chiefly by obviating the need to smelt ore with the attendant release of sulfur dioxide. Outside South America, Indonesia had developed into a major copper producer, largely as a result of Freeport Indonesia’s huge Grasberg deposit, a veritable copper mountain where exploration continued to expand reserves that were now the third largest in the world.

There was major exploration potential for several metals in the countries of the former Soviet Union, and a number of Western companies were active there. Thus far, however, poor infrastructure, doubts about ownership, and political uncertainty had discouraged major foreign investment in projects other than gold.

Commodities

On the London Metal Exchange (LME)--the world’s principal terminal market for aluminum, copper, lead, nickel, zinc, and tin--stocks of metal at the start of 1994 were very high, supplies plentiful, and demand modest. Most producers were resigned to the prospect of another lean year, but this proved not to be the case when investment fund managers switched their interest to commodities, which were seen as having reached their price lows. When the huge volume of cash held by investment funds was moved into commodities, prices moved ahead despite weak supply-and-demand fundamentals. Later in the year, as demand began to strengthen, LME prices began to soar, and by mid-October the prices for copper, aluminum, and lead had risen 60%, 70%, and 80%, respectively, from their 1993 price lows.

Aluminum benefited further as a voluntary agreement reached in January by the European Union and leading producers, including Russia, to reduce output began to affect supply. High-cost European producers failed to agree on coordinated production cuts for zinc, which was the weakest performer on the LME. Nickel benefited from forecasts of strong growth in the stainless steel industry, its principal customer, and climbed to a two-year price peak.

The tin market remained weak despite the best efforts of producers to restrict supplies by voluntary export quotas. The seven-member Association of Tin Producing Countries welcomed China to its ranks, and Brazil agreed to join in 1995, which should give members control over more than 80% of the world’s supply. The surplus of tin stocks was being reduced only slowly, however, and major new applications had not yet been developed to replace its diminished share of the can market lost to aluminum.

The world’s two largest iron ore exporters, Brazil and China, had to settle for lower prices in their contracts with Japanese steelmakers in 1994 because of the weak Japanese economy, but the average price reduction was significantly less than the 10% cut some had feared. China emerged as the leading producer of iron ore, but its mines were still unable to keep pace with demand, and there were forecasts that it would have to import as much as 50 million tons per year by the end of the century. Australian producers stood to benefit most.

In the energy sector, world consumption, which had been flat since the peak demand reached in 1990, managed a slight improvement in 1993, and the trend appeared to have continued in 1994. The growth was generally in demand for natural gas, however, at the expense of coal, particularly in Europe. The coal industry in the U.K. was privatized in December, and some 30 British Coal mines were sold. RJB Mining, a relative newcomer to coal mining, bought 17, the largest number of any firm, for £ 815 million. In all, the selloff brought in almost £ 1 billion to the treasury. In the period that the pits were nationalized, 1946-94, the number of coal miners dropped from 700,000 to about 7,000. It was significant that two major U.K.-based companies, RTZ and Hanson, preferred to set their sights on the United States, where both expanded their interests by acquiring substantial low-sulfur coal deposits. In South Africa two large coal producers, Randcoal and Trans-Natal Coal, announced merger plans involving assets worth R 4.3 billion. At nearly 60 million metric tons per year, the merged company would become the world’s third largest privately owned hard coal producer.

Uranium producers suffered another year of low prices, and Canada reinforced its position as the major producing country. In Australia, which possessed huge uranium resources, development continued to be constrained by the government’s three-mine policy.

Metallgesellschaft, one of Germany’s largest industrial conglomerates with major metals interests, faced a grave liquidity crisis early in 1994 related to its exposure in U.S. oil-futures trading. Its share price collapsed, and Deutsche Bank, its dominant shareholder and creditor, staged a rescue operation to avoid bankruptcy proceedings.

In South Africa in July, Gencor reached an agreement with the Royal Dutch/Shell Group to acquire most of the oil giant’s mineral assets held by its subsidiary, Billiton, for an estimated $1.2 billion. Substantial bauxite and aluminum interests were the main attraction. Gencor was a participant in a major new South African aluminum smelter and was seeking a secure source of raw materials. It would also benefit from Billiton’s worldwide aluminum trading and marketing network.

Elsewhere, two of the largest aluminum producers, Aluminum Co. of America and Western Mining of Australia, announced plans in July for a merger of their worldwide alumina and bauxite-mining interests involving assets worth $A 7.5 billion. It would give the partners a 25% share of the world market for alumina. The proposed merger of two of the largest U.S. mining-equipment manufacturers, Harnischfeger Industries and Joy Technologies, was announced in August. The former already had a 75% share of the U.S. surface-mining-equipment market and the latter an 80% share of the underground-equipment market. The combined group would have a total market value of about $1 billion. In September, in a deal worth $A 740 million, it was announced that the Australian gold producer Normandy Poseidon and the French state-owned mineral and geologic agency Bureau de Recherches Geologiques et Minieres proposed forming a major new international mining company to be based in France. BRGM would contribute its international portfolio of mineral reserves and mining interests, and Normandy Poseidon would provide financial support and management experience.

Environment and Safety

As in 1993, concern continued about environmental damage caused by mining and smelting activities in the countries of the former Soviet Union. Although the importance of environmental protection was recognized by the governments involved and substantial efforts were being made to stem pollution, the task was enormous and was unlikely to be achieved without substantial financial assistance from Western countries.

In North America the industry had to contend with a vociferous antimining lobby and could ill afford the bad publicity resulting from the Summitville gold-mine disaster in Colorado, where cyanide and reactive sulfide waste material contaminated the groundwater and surrounding drainage system. The bankruptcy of the operator and the inadequacy of the financial surety for reclamation meant that the state of Colorado and the U.S. Environmental Protection Agency had to assume site management at a daily cost of some $40,000.

News that the Chinese government had ordered stricter enforcement of its mining safety law was a welcome development. An official decree called for better supervision at state mines and at thousands of small township mines, many of which were operating illegally without adequate safety measures. Government statistics indicated that as many as 10,000 miners had been killed each year as a result of mine collapses, explosions, and other accidents during the early 1990s, and the state radio reported that deaths had risen by 15% in the first eight months of 1994 alone. The main problem lay in the surge in development of small coal mines--about 120,000 such operations existed. Nearly one-third did not have operating licenses, and almost 75% failed to meet even basic safety standards. Roger Ellis